##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)
 x
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004
OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from               to Commission file number 000-31511 @ROAD, INC. (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    94-3209170
(I.R.S. Employer
Identification No.)
 47200 Bayside Parkway
Fremont, CA 94538
(Address of principal executive offices, including zip code) 510-668-1638
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes     x      No     o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes     x      No     o As of November 1, 2004
there were 54,770,515 shares of the registrants Common Stock
outstanding.




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##### Table of Contents



INDEX PART I.
    
    FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements.
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003.
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003.
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2004,
and September 30, 2003 and the three months ended December 31, 2003.
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003.
    
    
    6Notes to Condensed Consolidated Financial Statements.
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    27Item 4. Controls and Procedures.
    
    
    28PART II.
    
    OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings.
    
    
    29Item 6. Exhibits.
    
    
    29EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements. @Road, Inc. 
 Condensed Consolidated Balance Sheets
(In thousands, except per share data) (unaudited)
 September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,849
    
    
    $
    103,669Short-term investments
    
    
    93,931
    
    
    
    2,000Accounts receivable
    
    
    6,536
    
    
    
    7,109Inventories
    
    
    3,274
    
    
    
    2,425Deferred product costs
    
    
    11,566
    
    
    
    11,921Prepaid expenses and other
    
    
    987
    
    
    
    1,269Total current assets
    
    
    137,143
    
    
    
    128,393Property and equipment, net
    
    
    2,266
    
    
    
    2,298Deferred product costs
    
    
    6,693
    
    
    
    7,270Intangible assets, net
    
    
    
    
    
    
    28Other assets
    
    
    330
    
    
    
    1,027Total assets
    
    $
    146,432
    
    
    $
    139,016LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,927
    
    
    $
    5,057Accrued liabilities
    
    
    5,105
    
    
    
    5,465Deferred revenue and customer deposits
    
    
    10,234
    
    
    
    9,751Total current liabilities
    
    
    19,266
    
    
    
    20,273Deferred revenue
    
    
    5,534
    
    
    
    6,582Other long-term liabilities
    
    
    6
    
    
    
    33Total liabilities
    
    
    24,806
    
    
    
    26,888Stockholders equity:Preferred stock, $0.0001 par value,
10,000 shares authorized, shares issued
and outstanding: none at September 30,
2004 and December 31, 2003
    
    
    
    
    
    
    Common stock, $0.0001 par value, 250,000
shares authorized, shares issued and
outstanding: 54,532 at September 30,
2004, 53,700 at December 31, 2003
    
    
    230,898
    
    
    
    228,441Deferred stock compensation
    
    
    
    
    
    
    (4
    )Notes receivable from stockholders
    
    
    
    
    
    
    (87
    )Accumulated other comprehensive loss
    
    
    (156
    )
    
    
    Accumulated deficit
    
    
    (109,116
    )
    
    
    (116,222
    )Total stockholders equity
    
    
    121,626
    
    
    
    112,128Total liabilities and stockholders equity
    
    $
    146,432
    
    
    $
    139,016
 See notes to condensed consolidated financial statements. 3




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@Road, Inc. 
 Condensed Consolidated Statements of Operations
(In thousands, except per share data) (unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Service
    
    $
    14,920
    
    
    $
    13,113
    
    
    $
    43,332
    
    
    $
    35,851Product
    
    
    4,182
    
    
    
    3,503
    
    
    
    11,993
    
    
    
    10,275Total revenues
    
    
    19,102
    
    
    
    16,616
    
    
    
    55,325
    
    
    
    46,126Costs and expenses:Cost of service revenue (excluding intangibles
amortization included below)
    
    
    4,206
    
    
    
    3,782
    
    
    
    12,447
    
    
    
    11,840Cost of product revenue
    
    
    4,376
    
    
    
    5,249
    
    
    
    13,172
    
    
    
    15,078Intangibles amortization
    
    
    7
    
    
    
    11
    
    
    
    28
    
    
    
    445Sales and marketing
    
    
    2,929
    
    
    
    2,907
    
    
    
    9,122
    
    
    
    8,344Research and development
    
    
    1,695
    
    
    
    1,386
    
    
    
    4,493
    
    
    
    4,019General and administrative
    
    
    3,240
    
    
    
    2,189
    
    
    
    7,793
    
    
    
    6,847Terminated acquisition costs
    
    
    139

    
    
    
    
    
    
    

    2,156Stock compensation(*)
    
    
    
    
    
    
    154
    
    
    
    4
    
    
    
    441Total costs and expenses
    
    
    16,592
    
    
    
    15,678
    
    
    
    49,215
    
    
    
    47,014Income (loss) from operations
    
    
    2,510
    
    
    
    938
    
    
    
    6,110
    
    
    
    (888
    )Other income (expense), net:Interest income, net
    
    
    426
    
    
    
    151
    
    
    
    1,009
    
    
    
    436Other income (expense), net
    
    
    (6
    )
    
    
    6
    
    
    
    (13
    )
    
    
    17Total other income (expense), net
    
    
    420
    
    
    
    157
    
    
    
    996
    
    
    
    453Net income (loss)
    
    $
    2,930
    
    
    $
    1,095
    
    
    $
    7,106
    
    
    $
    (435
    )Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.13
    
    
    $
    (0.01
    )Diluted
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.12
    
    
    $
    (0.01
    )Shares used in calculating net income (loss) per share:Basic
    
    
    54,498
    
    
    
    50,689
    
    
    
    54,156
    
    
    
    48,821Diluted
    
    
    56,199
    
    
    
    55,813
    
    
    
    57,424
    
    
    
    48,821(*)Stock compensation:Cost of service revenue
    
    $
    
    
    
    $
    2
    
    
    $
    
    
    
    $
    9Cost of product revenue
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    25Sales and marketing
    
    
    
    
    
    
    13
    
    
    
    1
    
    
    
    23Research and development
    
    
    
    
    
    
    36
    
    
    
    1
    
    
    
    86General and administrative
    
    
    
    
    
    
    92
    
    
    
    2
    
    
    
    298Total
    
    $
    
    
    
    $
    154
    
    
    $
    4
    
    
    $
    441
 See notes to condensed consolidated financial statements. 4




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@Road, Inc. 
 Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income
For the Nine Months Ended September 30, 2004 and 2003
and the Three Months Ended December 31, 2003
(In thousands) (unaudited)
 Notes
    
    AccumulatedCommon Stock
    
    Deferred
    
    Receivable
    
    Other
    
    
    
    
    
    
    
    
    
    TotalStock
    
    From
    
    Comprehensive
    
    Accumulated
    
    Stockholders
    
    ComprehensiveShares
    
    Amount
    
    Compensation
    
    Stockholders
    
    Loss
    
    Deficit
    
    Equity
    
    Income (Loss)BALANCES, January 1, 2003
    
    
    47,747
    
    
    $
    170,610
    
    
    $
    (491
    )
    
    $
    (2,068
    )
    
    $
    
    
    
    $
    (117,884
    )
    
    $
    50,167Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (435
    )
    
    
    (435
    )
    
    $
    (435
    )Common stock issued
through second public
offering, net of
issuance costs
    
    
    4,000
    
    
    
    51,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,850Shares issued under
employee stock
purchase plan
    
    
    288
    
    
    
    595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595Exercise of stock options
    
    
    1,185
    
    
    
    3,614
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,614Collection of notes
receivable from
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,981
    
    
    
    
    
    
    
    
    
    
    
    1,981Deferred stock
compensation
    
    
    
    
    
    
    5
    
    
    
    (5
    )Reversal of deferred
stock compensation due
to employee
terminations
    
    
    
    
    
    
    (25
    )
    
    
    25Amortization of deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441BALANCES, September 30,
2003
    
    
    53,220
    
    
    
    226,649
    
    
    
    (30
    )
    
    
    (87
    )
    
    
    
    
    
    
    (118,319
    )
    
    
    108,213Net (loss) income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,097
    
    
    
    2,097
    
    
    $
    2,097Common stock issued
through secondary
public offering, net
of issuance costs
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39Shares issued under
employee stock
purchase plan
    
    
    275
    
    
    
    889
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    889Exercise of stock options
    
    
    205
    
    
    
    864
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    864Collection of notes
receivable from
stockholdersAmortization of deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26BALANCES, December 31,
2003
    
    
    53,700
    
    
    
    228,441
    
    
    
    (4
    )
    
    
    (87
    )
    
    
    
    
    
    
    (116,222
    )
    
    
    112,128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,106
    
    
    
    7,106
    
    
    $
    7,106Unrealized gain (loss)
loss on short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156
    )
    
    
    
    
    
    
    (156
    )
    
    
    (156
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,,950Shares issued under
employee stock
purchase plan
    
    
    243
    
    
    
    1,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,129Exercise of stock options
    
    
    589
    
    
    
    1,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,328Collection of notes
receivable from
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    87Amortization of deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4BALANCES, September 30,
2004
    
    
    54,532
    
    
    $
    230,898
    
    
    $
    
    
    
    $
    
    
    
    $
    (156
    )
    
    $
    (109,116
    )
    
    $
    121,626
 See notes to condensed consolidated financial statements. 5




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@Road, Inc. 
 Condensed Consolidated Statements of Cash Flows
(In thousands) (unaudited)
 Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    7,106
    
    
    $
    (435
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Write-off of
deferred acquisition costs
    
    
    1,095
    
    
    
    Depreciation and amortization
    
    
    939
    
    
    
    1,862Loss on disposal of property and equipment
    
    
    
    
    
    
    6Amortization of deferred stock compensation
    
    
    4
    
    
    
    441(Reversal) provision for inventory reserves
    
    
    (27
    )
    
    
    1,071(Reversal) provision for doubtful accounts and sales returns
    
    
    (546
    )
    
    
    (68
    )Change in assets and liabilities:Accounts receivable
    
    
    1,119
    
    
    
    627Inventories
    
    
    (822
    )
    
    
    1,998Deferred product costs
    
    
    932
    
    
    
    (3,253
    )Prepaid expenses and other
    
    
    (116
    )
    
    
    62Accounts payable
    
    
    (1,130
    )
    
    
    (993
    )Accrued and other liabilities
    
    
    (387
    )
    
    
    1,152Deferred revenue and customer deposits
    
    
    (565
    )
    
    
    3,079Net cash provided by operating activities
    
    
    7,602
    
    
    
    5,549Cash flows from investing activities:Purchase of property and equipment
    
    
    (879
    )
    
    
    (1,094
    )Purchase of short-term investments
    
    
    (123,016
    )
    
    
    Proceeds from the sale of short-term investments
    
    
    30,929
    
    
    
    241Net cash used in investing activities
    
    
    (92,966
    )
    
    
    (853
    )Cash flows from financing activities:Proceeds from sale of common stock
    
    
    2,457
    
    
    
    56,059Proceeds from payments on notes receivable issued to stockholders
    
    
    87
    
    
    
    1,981Net cash provided by financing activities
    
    
    2,544
    
    
    
    58,040Net increase (decrease) in cash and cash equivalents
    
    
    (82,820
    )
    
    
    62,736Cash and cash equivalents:Beginning of period
    
    
    103,669
    
    
    
    35,659End of period
    
    $
    20,849
    
    
    $
    98,395Non-cash investing and financing activities:Deferred stock compensation
    
    $
    
    
    
    $
    5Reversal of deferred stock compensation
    
    $
    
    
    
    $
    25Unrealized loss on short-term investments
    
    $
    (156
    )
    
    $
    
 See notes to condensed consolidated financial statements. 6




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@Road, Inc. 
 Notes To Condensed Consolidated Financial Statements
 Note 1  Basis of Presentation and Summary of Significant Accounting Policies The accompanying condensed consolidated financial statements were prepared
by @Road, Inc. (Company), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures which are made
herein are adequate to make the information presented not misleading. In the
opinion of management, the financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the financial condition, results of operations, and cash flows for the periods
presented. Results of operations for the periods presented are not necessarily
indicative of results to be expected for any other interim period or for the
full year. These condensed consolidated financial statements should be read in
conjunction with the Companys consolidated financial statements and notes
thereto in its Form 10-K for the year ended December 31, 2003 (No. 000-31511),
filed with the SEC. Motorola is the sole supplier of microcontrollers used in the Companys
products. The Company expects to rely on Motorola as a source for this
component for the next several years. Taiwan Semiconductor Manufacturing
Company (TSMC) is the sole manufacturer of the Companys Global Positioning
System digital receiver chips used in some of the Companys products. The
Company expects to rely on TSMC as a source for this component for at least the
next twelve months. Note 2  Basic and Diluted Net Income (Loss) per Share Basic net income (loss) per share is computed by dividing the net income
for the period by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by dividing
the net income (loss) for the period by the weighted average number of shares
of common stock and potentially dilutive common stock outstanding during the
period. Potentially dilutive common stock, composed of unvested, restricted
common stock and incremental shares of common stock issuable upon the exercise
of stock options, are included in diluted net income (loss) per share to the
extent such shares are dilutive. Potentially dilutive shares that are
anti-dilutive, as calculated based on the weighted average closing price of our
common stock for the period, are excluded from the calculation of diluted net
income (loss) per share. Common share equivalents are excluded from the
computation in loss periods, as their effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net
income per share for the periods indicated (in thousands, except per share
data): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    2,930
    
    
    $
    1,095
    
    
    $
    7,106
    
    
    $
    (435
    )Shares (denominator):BasicWeighted average common shares outstanding
    
    
    54,498
    
    
    
    50,797
    
    
    
    54,161
    
    
    
    49,016Weighted average common shares outstanding subject to repurchase
    
    
    
    
    
    
    (108
    )
    
    
    (5
    )
    
    
    (195
    )Shares used in computation of basic net income (loss) per share
    
    
    54,498
    
    
    
    50,689
    
    
    
    54,156
    
    
    
    48,821DilutedDilution impact from option equivalent shares
    
    
    1,663
    
    
    
    4,815
    
    
    
    3,233
    
    
    
    n/aDilution impact from employee stock purchase plan
    
    
    38
    
    
    
    201
    
    
    
    30
    
    
    
    n/aAdd back weighted average common shares subject to repurchase
    
    
    
    
    
    
    108
    
    
    
    5
    
    
    
    n/aShares used in computation of diluted net income (loss) per share
    
    
    56,199
    
    
    
    55,813
    
    
    
    57,424
    
    
    
    48,821Basic net income (loss) per share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.13
    
    
    ($
    0.01
    )Diluted net income (loss) per share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.12
    
    
    ($
    0.01
    )
 Employee stock options to purchase approximately 3,944,000 shares with a
weighted average exercise price of $8.10 and approximately 97,000 shares with a
weighted average exercise price of $13.33 for the three months ended September
30, 2004 and 2003, respectively, and approximately 1,689,000 shares with a
weighted average exercise price of $11.11 and approximately 1,135,000 shares
with a weighted average exercise price of $9.74 for the nine months ended
September 30, 2003, respectively, were 7




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outstanding, but were not included in the computation of diluted earnings per
share because their effect would have been anti-dilutive. Common stock subject
to repurchase of approximately 79,000 shares with a weighted average repurchase
price of $0.89 as of September 30, 2003, were outstanding, but were not
included in the computation of diluted earnings per share because their effect
would have been anti-dilutive. Note 3  Balance Sheet Components Inventories consists of raw materials, work in process and finished goods,
and are stated at the lower of cost (average cost) or market and consisted as
follows (in thousands): September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    971
    
    
    $
    1,294Work in process
    
    
    285
    
    
    
    177Finished goods
    
    
    2,018
    
    
    
    954Total
    
    $
    3,274
    
    
    $
    2,425
 Deferred revenue and customer deposits (excluding long-term deferred
revenue) consisted as follows (in thousands): September 30,
    
    December 31,2004
    
    2003Deferred revenue
    
    $
    9,853
    
    
    $
    9,341Customer deposits
    
    
    381
    
    
    
    410Total
    
    $
    10,234
    
    
    $
    9,751
 Note 4  Stock-Based Awards Consistent with predominant industry practice, the Company accounts for
stock-based employee compensation issued under compensatory plans using the
intrinsic value method, which calculates compensation expense based on the
difference, if any, on the date of the grant, between the fair value of its
stock and the option exercise price. Accounting principles generally accepted
in the United States of America require companies that choose to account for stock option
grants using the intrinsic value method to also determine the fair value of
option grants using an option pricing model, such as the Black-Scholes model,
and to disclose the impact of fair value accounting in a note to the financial
statements. In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation Transition and Disclosure, an Amendment of FASB
Statement No. 123. The Company did not elect to voluntarily change to the fair
value based method of accounting for stock based employee compensation and
record such amounts as charges to operating expense. The impact of recognizing
the fair value of stock option grants and stock purchased under its employee
stock purchase plan as an expense under SFAS No. 148 would have substantially
affected its reported net income (loss), as follows (in thousands, except per share data): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    2,930
    
    
    $
    1,095
    
    
    $
    7,106
    
    
    $
    (435
    )Add: employee stock-based
compensation expense included in
reported net income (loss), net of
related tax affects
    
    
    
    
    
    
    154
    
    
    
    4
    
    
    
    435Deduct: employee stock-based
compensation expense determined
under fair value based method for
all awards, net of related tax
affects
    
    
    (1,883
    )
    
    
    (2,391
    )
    
    
    (5,444
    )
    
    
    (6,695
    )Pro forma net income (loss)
    
    $
    1,047
    
    
    $
    (1,142
    )
    
    $
    1,666
    
    
    $
    (6,695
    )Basic net income (loss) per share:As reported
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.13
    
    
    $
    (0.01
    )Pro forma
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.14
    )Diluted net income (loss) per share:As reported
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.12
    
    
    $
    (0.01
    )Pro forma
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.14
    )
 8




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##### Table of Contents



The weighted average fair value of options granted in the three months
ended September 30, 2004 and 2003, was $2.75 and $9.89, respectively. The
weighted average fair value of options granted in the nine months ended
September 30, 2004 and 2003, was $3.79 and $7.16, respectively. The Company calculated the fair value of each option award on the date of
grant using the Black-Scholes option pricing model. The following assumptions
were used for each respective period: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Stock Option Plans:Risk free interest rate
    
    
    3.47
    %
    
    
    2.85
    %
    
    
    3.37
    %
    
    
    2.79
    %Expected volatility
    
    
    107
    %
    
    
    115
    %
    
    
    106
    %
    
    
    116
    %Expected life (in years)
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Expected dividend
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Employee Stock Purchase Plan:Risk free interest rate
    
    
    1.11
    %
    
    
    1.13
    %
    
    
    1.06
    %
    
    
    1.22
    %Expected volatility
    
    
    63
    %
    
    
    115
    %
    
    
    67
    %
    
    
    117
    %Expected life (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Expected dividend
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
 The Company accounts for stock-based arrangements issued to non-employees
using the fair value based method, which calculates compensation expense based
on the fair value of the stock options granted using the Black-Scholes option
pricing model at the date of grant, or over the period of performance, as
appropriate. Note 5  Intangible Assets On January 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 142 requires purchased intangible assets other than goodwill to
be amortized over their expected useful lives unless these lives are determined
to be indefinite. Purchased intangible assets are carried at cost less
accumulated amortization. Amortization is computed over the estimated useful
lives of the respective assets, generally two to three years. Intangible assets were as follows (in thousands): At September 30, 2004
    
    At December 31, 2003Carrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    AccumulatedAmount
    
    Depreciation
    
    Net
    
    Amount
    
    Depreciation
    
    NetPurchased technology
    
    $
    5,052
    
    
    
    5,052
    
    
    
    
    
    
    $
    5,052
    
    
    $
    (5,024
    )
    
    $
    28
 For the nine months ended September 30, 2004 and 2003, amortization of
purchased technology was $28,000 and $445,000, respectively. Purchased
technology was fully amortized at September 30, 2004. Note 6  Segment Reporting During the three and nine months ended September 30, 2004
and 2003, the Company operated in a single reportable segment. The Company plans to evaluate additional
segment disclosure requirements as it expands its operations. The Company had no significant revenues
from customers outside of the United States for the three and nine months ended September 30, 2004
and 2003 and had no significant long-lived
assets deployed outside the United States at September 30, 2004. 9




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##### Table of Contents



Note 7  Recently Issued Accounting Pronouncements Share-Based Payments On March 31, 2004, the FASB issued a proposed Statement, Share-Based
Payment, an amendment of FASB Statements No. 123 and 95, that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise
or liabilities that are based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using the intrinsic value method as prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and generally would require that such transactions be accounted
for using a fair-value-based method and recognized as expenses in its
consolidated statement of operations. The proposed standard would require that
the modified prospective method be used, which requires that the fair value of
new awards granted from the beginning of the year of adoption (plus unvested
awards at the date of adoption) be expensed over the vesting period. In
addition, in its current form, the proposed statement would require companies
to assess the most appropriate model to calculate the value of the options. The
Company currently uses the Black-Scholes option pricing model to value options
and is currently assessing which model it may use in the future under the
proposed statement and may deem an alternative model, such as the binomial
approach, to be the most appropriate. The use of the binomial approach to
value options may result in a different fair value than the use of the
Black-Scholes option pricing model. The recommended effective date of the
proposed standard for public companies is currently for fiscal periods beginning
after June 15, 2005. Should this proposed statement be finalized in its current form, it will
have a significant impact on the Companys consolidated statement of operations
as the Company will be required to expense the fair value of its stock option
grants and stock purchases under our employee stock purchase plan rather than
disclose the impact on its consolidated net income (loss) within its footnotes (see
Note 4), as is the Companys current practice. In addition, there are a number
of implementation questions that are not fully resolved by the proposed
statement. As a result, there may be additional changes that would be reflected
in the Companys consolidated financial statements upon issuance of the final
standard. Note 8  Commitments and Contingencies In the third quarter of 2002, AT&T Wireless announced that it expected to
cease operating its Cellular Digital Packet Data (CDPD) network by June 30,
2004. On March 11, 2004, the Company received notice that AT&T Wireless would
continue to operate its CDPD network for certain valuable partners, including
@Road, until at least September 30, 2004. The letter also stated that this
extension of CDPD network availability extends across all AT&T Wireless
geographic locations. On May 28, 2004, the Company received notice that AT&T
Wireless extended availability of its CDPD network to June 30, 2005. The Company is in discussions with AT&T Wireless to minimize any
disruption to the delivery of its services to @Road customers. The
Company has notified those subscribers whose service would be affected by the
proposed termination of the AT&T Wireless CDPD network. At September 30, 2004,
approximately one quarter of the Companys total subscribers utilize the AT&T
Wireless CDPD network. The majority of those subscribers have yet to complete
their negotiations with @Road for migration to an alternate network. The
Company estimates that as of June 30, 2005 it will have approximately 2,500
subscribers in their initial contract periods, included above, that are then using the AT&T
Wireless CDPD network. In its Report on Form 10-K filed with the SEC on March 27, 2003, Verizon
Wireless disclosed that it expects to cease operating its CDPD network at the
end of 2005. The Company is in discussions with Verizon Wireless to minimize
any disruption to the delivery of its services to @Road customers.
The Company has notified those subscribers whose service would be affected by
the proposed termination of the Verizon Wireless CDPD network. At September 30,
2004, approximately one quarter of the Companys total subscribers utilize the
Verizon Wireless CDPD network. Less than half of those subscribers, or
approximately 10% of the Companys total subscribers, have yet to complete
their negotiations with @Road for migration to an alternate network. The
Company estimates that as of December 31, 2005 it will have approximately 5,000
subscribers in their initial contract periods, included above, that are then using the Verizon
Wireless CDPD network. To use an alternate network, existing hardware platforms would have to be
replaced for subscribers currently using a CDPD network. While the Company does
not anticipate losses on the sale of these replacement hardware platforms, if
it is unable to migrate these customers in a timely fashion, the Company may
offer price concessions. If the Company were to offer such concessions, they
could have a material adverse impact on the Companys financial results. 10




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##### Table of Contents



Lease Commitments On June 9, 2004, we entered into a sublease for our future principal
administrative and technical offices from 2005 through May, 2010 occupying 103,000
square feet in Fremont, California. We periodically evaluate the adequacy of
existing facilities and additional facilities in new cities and we believe that
suitable additional space will be available in the future on commercially
reasonable terms as needed. We recognize rent expense on a straight-line basis over the lease period
and have accrued for rent expense incurred but not paid. Rent expense was
$332,000 and $325,000 for the three months ended September 30, 2004 and 2003,
respectively, and $995,000 and $966,000 for the nine months ended September 30,
2004 and 2003, respectively. Legal Proceedings From
time to time, we are party to legal proceedings in the ordinary course of business.
Based on our evaluation of these matters, we believe that these matters will
not have a material effect on our results of operations or financial position. Other Contingencies The Company from time to time
enters into certain types of agreements that contingently require it to indemnify parties against third
party claims. These agreements primarily relate to: (i) certain
agreements with the Companys officers, directors and employees
and third parties, under which
the Company may be required to indemnify such persons for liabilities arising  out of the their duties
to the Company and (ii) certain agreements under which the Company indemnifies customers and partners
for claims such as those arising from intellectual property
infringement, personal injury, or non-performance under
the agreement. Such indemnification provisions are accounted for in
accordance with SFAS No. 5. To
date, the Company has not incurred any costs related to any claims under such indemnification provisions. The terms of such obligations
vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these
types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be
reasonably estimated. Historically, the Company has not been
obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on the Companys balance sheet as of September 30, 2004. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements involving risks and
uncertainties that could cause actual results to differ materially from those
in such forward-looking statements. Potential risks and uncertainties include,
but are not limited to, general economic and political conditions, our future
losses, operating results and profitability, limited operating history, the
impact of the termination, if any, of CDPD wireless networks, our ability to adapt to rapid technological change,
competition and our dependence on wireless networks, network infrastructure and
positioning systems owned and controlled by others. Further information
regarding these and other risks is included in this Form 10-Q, in our annual
report on Form 10-K for the year ended December 31, 2003 (No. 000-31511), filed
on March 12, 2004, and in our other filings with the SEC. You should read the
following description of our financial condition and results of operations in
conjunction with our financial statements and notes thereto included in this
Form 10-Q, in our Form 10-K for the year ended December 31, 2003 and in our
other filings with the SEC. Overview We are a leading provider of mobile resource management (MRM) services,
a rapidly growing category of business productivity solutions that enable the
effective management of mobile resources. Our MRM services allow customers to
improve productivity by enabling the effective management of their mobile
workers and assets, and their goods and services. In addition, our services are
designed to allow customers to increase the utility of their mobile resources
and decrease costs of operations by facilitating business processes, such as
event confirmation, signature verification, forms processing, project
management and timekeeping while their workers are in the field. Our services
also provide location, reporting, dispatch, messaging, and other management
services and are designed to be easy to implement and use. Our customers can
manage their mobile workers in several ways, including by logging onto our
website, having their data emailed to them, receiving their data directly into
their existing software applications, using any wireline or wireless telephone
to access our speech-to-text voice portal or requesting information from our
data centers using application programming interfaces. From July 1996 through June 1998, our operations consisted primarily of
various start-up activities relating to our current business, including
development of Global Positioning System technologies, recruiting personnel and
raising capital. We did not recognize any revenues prior to June 1998, and our
expenses consisted of research and development, sales and marketing and general
and administrative expenses. In 1998, we expanded our strategy and redirected
our focus to provide location-relevant and time-sensitive information services
and solutions to companies managing mobile resources. In the second half of
1998, we introduced FleetASAP, now called GeoManager, a service that leverages
existing infrastructure, including the Global Positioning System, wireless
networks and the Internet along with integrated transaction processing and
software applications, to enable companies to efficiently manage their mobile
resources. Subsequent to the introduction of FleetASAP, we have introduced a
number of additional services, including GeoManager Pocket Edition, @Road
Pathway, @Road Portico, @Road Mobile Hot Spot and DirectData, and have added numerous features to our
services. 11




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##### Table of Contents



Our services provide current and historical data relating to a customers
mobile resources in a variety of formats, including activity reports, maps and
completed business forms. We provide these formats in a standard configuration,
and customers can configure certain elements and views themselves to help
achieve compliance with their internal business rules. Customers can choose to
submit queries to our database to create reports and views on demand or they
can have reports delivered on a pre-scheduled basis. Customers can also
download reports to manipulate and store data as desired. We typically store
mobile resource data for 14 days, unless the customer purchases our extended
data storage services. Our services are enabled by the deployment of a device, which we call a
platform, to each of the customers mobile resources. We call each mobile
resource with a platform that is activated to provide our services a subscriber. Our services operate with three
independent platforms. First, a mobile worker can use our proprietary hardware
device embedded with software that integrates a GPS receiver with a wireless
modem. Second, a mobile worker can use our proprietary hardware device embedded
with software and an integrated GPS receiver and which is tethered by cable to
a wireless telephone. Both of these proprietary hardware devices is called an
Internet Location Manager. The Internet Location Manager is installed in a
mobile workers vehicle. Installation in any type of vehicle typically takes
less than an hour, and is completed by our subcontracted installation agents.
Third, a mobile worker can use a location- or wireless application
protocol-enabled mobile telephone installed with our software application. These platforms send and receive a variety of information from time to
time and on demand. Such data include location, velocity, time and operational
diagnostics. These data are transmitted to our data centers using wireless
networks and the Internet. If a wireless connection is not available, then the
platform will store up to five days of captured data and seek to transmit the
data when a wireless connection is available. Since 1998, we have derived substantially all of our revenues from the
sale of our services and the associated product hardware. Our service revenue
is comprised of monthly fees. Our customers can contract to receive our
services for terms of one, two or three years and can purchase enhanced service
features for additional fees. As more customers use our services, the impact on
our service revenue is compounded. Our product revenue consists of sales of the
Internet Location Manager, Internet Data Terminal and ruggedized personal
digital assistant. To date, we have not sold our services outside the United States and
Canada; however, we intend to expand our service offerings to additional
countries in the future. We do not expect that revenues from international
sales will be material in 2004. Verizon Communications represented 18% and 16%
of our revenues for the nine months ended September 30, 2004 and 2003,
respectively. Since inception we have invested substantially in research and
development, marketing, the building of our sales channels and our overall
infrastructure. We anticipate that such investments may increase in the future.
We incurred losses in each quarter from inception through the quarter ending
June 30, 2003, and may incur net losses in the future. At September 30, 2004,
we had an accumulated deficit of $109.1 million. Our limited operating history
makes it difficult to forecast future operating results. We may not sustain or
increase profitability on a quarterly or annual basis. In the third quarter of 2002, AT&T Wireless announced that it expected to
cease operating its Cellular Digital Packet Data (CDPD) network by June 30,
2004. On March 11, 2004, we received notice that AT&T Wireless would continue
to operate its CDPD network for certain valuable partners, including us,
until at least September 30, 2004. The letter also stated that this extension
of CDPD network availability extends across all AT&T Wireless geographic
locations. On May 28, 2004, we received notice that AT&T Wireless extended
availability of its CDPD network to June 30, 2005. We are in discussions with AT&T Wireless to minimize any disruption to the
delivery of our services to our customers. We have notified those subscribers
whose service would be affected by the proposed termination of the AT&T
Wireless CDPD network. At September 30, 2004, approximately one quarter of our
total subscribers utilize the AT&T Wireless CDPD network. The majority of
those subscribers have yet to complete their negotiations with us for migration
to an alternate network. We estimate that as of June 30, 2005 we will have
approximately 2,500 subscribers in their initial contract periods, included above, that are then
using the AT&T Wireless CDPD network. In its Report on Form 10-K filed with the SEC on March 27, 2003, Verizon
Wireless disclosed that it expects to cease operating its CDPD network at the
end of 2005. We are in discussions with Verizon Wireless to minimize any
disruption to the delivery of our services to our customers. We have notified
those subscribers whose service would be affected by the proposed termination
of the Verizon Wireless CDPD network. At September 30, 2004, approximately one
quarter of our total subscribers utilize the Verizon Wireless CDPD network.
Less than half of those subscribers, or approximately 10% of our total
subscribers, have yet to complete 12




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##### Table of Contents



their negotiations with us for migration to an alternate network. We
estimate that as of December 31, 2005 we will have approximately 5,000 subscribers
in their initial contract periods, included above, that are then using the Verizon Wireless CDPD
network. To use an alternate network, existing hardware platforms would have to be
replaced for subscribers currently using a CDPD network. While we do not
anticipate losses on the sale of these replacement hardware platforms, if we
are unable to migrate our customers in a timely fashion, we may offer price
concessions. If we were to offer such concessions, they could have a material
adverse impact on our financial results. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate
and report on our internal control structure and procedures over financial
reporting. In addition, our independent registered public accounting
firm must report on our
evaluation as well as evaluate our internal control structure and procedures.
We are in the process of documenting and testing our system of internal
controls; upon completion of our review, certain deficiencies  may be
discovered that will require remediation. Such remediation may require implementing certain information
systems operating protocols and/or additional manual controls, the cost of
which could have an adverse effect on our business, financial condition and
results of operations. Due to the ongoing evaluation and testing of our
internal controls, we cannot assure that there will be no significant
deficiencies or material weaknesses. In addition, we expect the evaluation
process and any required remediation, if applicable, to increase our
accounting, legal and other costs. Critical accounting policies Financial Reporting Release No. 60, which was released by the SEC in
January 2002, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
Included in Note 1 of the Notes to the Consolidated Financial Statements for
the year ended December 31, 2003 filed on Form 10-K, is a summary of the
significant accounting policies and methods we use. The following is a
discussion of the more significant of these policies and methods. Revenue recognition In accordance with applicable accounting standards, including SOP No.
97-2, Software Revenue Recognition, as amended, we recognize revenue when
earned. Specifically, we recognize revenue when the price is fixed and
determinable, upon persuasive evidence of an agreement, when we have fulfilled
our obligations under any such agreement and upon a determination that
collection is probable. Our services are only available by using our platform or a location- or
wireless application protocol-enabled mobile telephone. Service revenue, which
is comprised of monthly fees, are recognized ratably over the minimum service
contract period, which commence (a) upon installation where the customers have
installed our platforms in mobile worker vehicles or (b) upon the creation of
subscription licenses and a customer account on our website where customers
have elected to use our services with a location-enabled mobile telephone. Our product revenue primarily consists of sales of the Internet Location
Manager, Internet Data Terminal and ruggedized personal digital assistant. We
defer product revenue at installation and recognize it ratably over the minimum
service contract period, which generally is two or three years. Renewal rates
for our services are not considered priced at a bargain in comparison to the
initial sales price of an associated product (as described in Staff Accounting
Bulletin No. 104, Revenue Recognition). Changes to the pricing of our products
and services in the future could result in the recognition of product revenue
over periods that extend beyond the minimum service contract period. Historically, the selling prices of our products have often been at or
below our costs. Product costs not in excess of related product revenue are
deferred at the time of shipment and amortized ratably over the minimum service
contract period. Where the selling prices of our products are below our costs,
we expense the difference at the time of shipment of the related products. Allowances for doubtful accounts Historically, we have had a significant number of small- to medium-sized
companies utilizing our services. These customers are involved in diverse
businesses. Our payment arrangements with customers generally provide 30-day
payment terms. At the time that customers contract with us for our services, we
assess their creditworthiness. 13




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##### Table of Contents



Certain of our customers may and have had difficulty with their cash
flows. The nature of our relationship with customers is inherently long-term
and we have extended and may extend payment terms on an exception basis. We
regularly review our customers ability to satisfy their payment obligations
and provide an allowance for doubtful accounts for all specific receivables
that we believe are not collectible. When these conditions arise, we suspend
recognition of revenue until collection becomes probable or cash is collected.
Beyond these specific customer accounts, we record an allowance based on the
size and age of all receivable balances against which we have not established a
specific allowance. These allowances are based on our experience in collecting
such accounts. Although we believe that we can make reliable estimates for doubtful
accounts, the size and diversity of our customer base, as well as overall
economic conditions, may affect our ability to accurately estimate revenue and
bad debt expense. Actual results may differ from those estimates. Income taxes We have substantial deferred tax assets that relate to prior period
losses, primarily in the United States. We evaluate these deferred tax assets
in each tax jurisdiction by estimating the likelihood of generating future
profits to realize these assets. In most cases, we have assumed that we will
not be able to generate sufficient future taxable income to realize these
assets and have recorded valuation reserves to reduce the net asset values to
zero. If these estimates and assumptions change in the future, we may be
required to record additional valuation allowances against the net deferred tax
assets resulting in additional income tax expense in our consolidated statement
of operations. Conversely, we may be able to reverse the valuation allowances
in future periods should we generate taxable income and our assumptions
regarding the generation of future taxable income change. At September 30,
2004, we had approximately $43.8 million of valuation allowances related to our
net deferred tax assets. 14




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##### Table of Contents



RESULTS OF OPERATIONS The three and nine months ended September 30, 2004 and 2003. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Service revenue
    
    $
    14,920
    
    
    $
    13,113
    
    
    $
    43,332
    
    
    $
    35,851Cost of service revenue (excluding
intangibles amortization included below)
    
    
    4,206
    
    
    
    3,782
    
    
    
    12,447
    
    
    
    11,840Intangibles amortization
    
    
    7
    
    
    
    11
    
    
    
    28
    
    
    
    445Stock compensation  cost of service revenue
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    9Total cost of service revenue
    
    
    4,213
    
    
    
    3,795
    
    
    
    12,475
    
    
    
    12,294Service gross margin
    
    $
    10,707
    
    
    $
    9,318
    
    
    $
    30,857
    
    
    $
    23,557Service gross margin percentage
    
    
    72
    %
    
    
    71
    %
    
    
    71
    %
    
    
    66
    %
 Service revenue Service revenue increased 14% and 21% for the three and nine months ended
September 30, 2004 from the same period in 2003, as a direct result of the
growth in our installed base of subscribers to our services. Subscribers were
approximately 131,000, 130,000, 130,000, 125,000, 117,000, 109,000, 99,000 and
90,000, at September 30, 2004, June 30, 2004, March 31, 2004, December 31,
2003, September 30, 2003 June 30, 2003, March 31, 2003 and December 31, 2002,
respectively. In addition to subscribers, our service revenue is affected by a
number of factors, including the rate at which service features or add-ons are
adopted and pricing associated with the size and term of customer contracts.
Given the fixed nature of our arrangements with our customers and ratable
revenue recognition, the impact on revenues of changes in current prices for
products and services is tempered. This is also because revenues from new
pricing are layered on top of revenues from existing subscribers. Price changes
did not have a material impact on service revenue between periods. Average
monthly revenue per subscriber was approximately $38.26 for the three months
ended September 30, 2004, down from $38.68 for the same period in 2003. The
decrease of $0.42 consists of an increase of approximately $0.27 related to the
adoption of additional service capabilities and features by subscribers and a
decrease of approximately $0.69 resulting from the price changes associated with the
types of services and size and term of contracts for new subscribers as the
revenues for the new subscribers were layered on top of the revenues from
existing subscribers. Average monthly revenue per subscriber was approximately
$37.32 for the nine months ended September 30, 2004, down from $38.33 for the
same period in 2003. The decrease of $1.01 consists of an increase of
approximately $0.26 related to the adoption of additional service capabilities
and features by subscribers and a decrease of approximately $1.27 resulting
from the price changes associated with the types of services and size and term
of contracts for new subscribers as the revenues for these new subscribers were
layered on top of revenues from existing subscribers. Underlying this change is a trend over recent quarters related to the
variety of wireless protocols we now offer customers, specifically, iDEN, GPRS,
and 1xRTT. We describe those arrangements in which customers contract directly
with carriers for the wireless airtime component of our service as unbundled.
Conversely, we describe arrangements in which we contract for the wireless
airtime portion as bundled. The nature of our relationship with the carriers
dictates whether we will be entering into a bundled or unbundled arrangement
with the customer. Selection of the appropriate protocol is related primarily
to optimal wireless coverage for a specific customer area of operation.
Additionally, we are indifferent as to what protocol is selected in that we
have priced our services such that a similar contribution to gross profits
results from either arrangement. We have observed an increase in the proportion
of new subscribers being added on an unbundled basis. We expect that this trend
will continue through the next 12 to 18 months. Cost of service revenue (excluding intangibles amortization) Cost of service revenue consists of expenses related to the delivery and
support of our services. Direct expenses are composed of costs associated with
connecting our services to wireless networks and the Internet, and royalty and
subscription fees paid to others. Support and other delivery costs include
expenses such as employee salaries and related expenses, and depreciation of
our data centers. Cost of service revenue increased to $4.2 million from $3.8
million for the three months ended September 30, 2004 and 2003, respectively.
The change is attributed to an increase in employee-related expenses of
$205,000 and delivery expenses of $150,000. Cost of service revenue headcount
increased to 103 from 84 at September 30, 2004 and 2003, respectively. Cost of
service revenue increased to $12.4 million from $11.8 million for the nine
months ended September 30, 2004 and 2003, respectively. The change in cost of
service revenue resulted from an increase in employee-related costs of
$817,000, offset in part by a decrease in depreciation of 15




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$249,000, as certain assets
became fully depreciated. We expect headcount increases related to
the delivery and support of our services to be moderate during the next
12 months. Direct expenses generally increase at a rate
proportional to the growth in subscribers using our services. Personnel costs
and depreciation expense generally increase at a slower rate than the growth
rate of subscribers to our services. As a result, we expect that the growth in
service revenue will be greater than the growth in cost of service revenue as
we continue to add subscribers. Service gross margin Service gross margins improved to 72% from 71% during the three months
ended September 30, 2004 and 2003 and improved to 71% from 66% during the nine
months ended September 20, 2004 and 2003, respectively, as a result of
increased service revenue, associated with growth in our installed base of
subscribers, and a smaller increase in overall cost of service revenue,
including intangibles amortization and stock compensation. Average subscribers
increased 15% and 24% for the three and nine months ended September 30, 2004
compared to the same period in the prior year. Cost of service revenue includes
fixed indirect expenses and, therefore, generally increases at rates slower
than the growth in our installed base of subscribers. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Product revenue
    
    $
    4,182
    
    
    $
    3,503
    
    
    $
    11,993
    
    
    $
    10,275Cost of product revenue
    
    
    4,376
    
    
    
    5,249
    
    
    
    13,172
    
    
    
    15,078Stock compensation  cost of product revenue
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    25Total cost of product revenue
    
    
    4,376
    
    
    
    5,260
    
    
    
    13,172
    
    
    
    15,103Product gross deficit
    
    $
    (194
    )
    
    $
    (1,757
    )
    
    
    (1,179
    )
    
    
    (4,828
    )Product gross deficit percentage
    
    
    (5
    )%
    
    
    (50
    )%
    
    
    (10
    )%
    
    
    (47
    )%
 Product revenue Product revenue increased 19% and 17% for the three and nine months ended
September 30, 2004, respectively, from the same periods in 2003. This growth is
consistent with the growth in our installed base of subscribers whose service
is enabled by deployment of an Internet Location Manager. As new subscribers
are added to our installed base, the amount of both deferred revenue and
deferred costs recognized ratably over the minimum service contract period
increases as well. This effect is tempered by the number of subscribers whose
service is deployed through the use of a location-enabled or wireless
application protocol-enabled mobile telephone installed with our software
application; we do not sell these devices and therefore do not recognize any
revenues or costs for such sales. Upon completion of the initial term of a
customers contract, recognition of both deferred product revenue and product
cost is complete. Customers may then renew their agreements for future services
without the purchase of new hardware and, therefore, we anticipate that product
revenue will grow more slowly than service revenue. Cost of product revenue Cost of product revenue consists of the cost of the Internet Location
Manager, Internet Data Terminal, ruggedized personal digital assistant and
related parts; costs associated with the final assembly, test, provisioning,
delivery and installation of our products; and other costs such as provisions
for inventory and repair costs. Historically, the selling prices of our
products were often at or below our costs. Product costs not in excess of
related product revenue are deferred at the time of shipment and amortized
ratably over the minimum service contract period. Where the selling prices of
our products are below our costs, we expense the difference at the time of
shipment of the related products. Generally, we expect the selling prices of
our products to be approximately equal to or exceed the product costs in future
periods. The impact of selling products below our cost on future cash flow from
operations is expected to be minimal. As new subscribers are added to our
installed base, the amount of both deferred revenue and deferred costs
recognized ratably increases. Upon completion of the initial term of a
customers contract, recognition of deferred product cost is complete.
Customers may then renew their agreements for future services without the
purchase of new hardware and, therefore, we anticipate that product revenue and
cost of product revenue will grow more slowly than service revenue. Cost of product revenue decreased to $4.4 million for the three months
ended September 30, 2004 from $5.2 million for the same period in 2003. The
decrease in cost of product revenue of $873,000 was primarily attributable to a
reduction in the provision for inventory obsolesce of $515,000, a reduction in
repair and warranty charges of $182,000 and a reduction in
lower-of-cost-or-market adjustments associated with discounting of hardware of
$149,000. Cost of product revenue decreased to $13.2 million from $15.1 million
for the nine months ended September 30, 2004 and 2003, respectively. The
decrease in cost of product revenue of $1.9 million was primarily attributable
to a reduction in the provision for inventory obsolesce of $1.1 million, a
reduction in the cost of products of $450,000 and a reduction in
lower-of-cost-or-market adjustments associated with discounting of hardware of
$356,000. 16




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Product gross deficit During the three and nine months ended September 30, 2004 and 2003,
product gross deficit improved to (5)% from (50)% and to (10)% from (47)%,
respectively. Increases in product revenue from deferrals associated with the
growth in our installed base of subscribers were greater than the related
increases in product costs from deferrals. While we expect the selling prices
of our products to be approximately equal to or to exceed product costs in
future periods, after considering other costs, such as those described in Cost
of product revenue above, we do not expect to generate significant product
gross margin during the next twelve months. Intangibles amortization Intangibles amortization relates to the intangible assets purchased from
Differential Corrections, Inc. in April 2000 and ConnectBusiness.com in
September 2002. The costs were amortized over estimated useful lives of three
and two years, respectively. The costs were fully amortized as of September 30,
2004. Sales and marketing expenses Sales and marketing expenses consist of employee salaries, sales
commissions, and marketing and promotional expenses. Sales and marketing
expenses remained flat at $2.9 million for the three months ended September 30,
2004 and 2003. Increases in employee-related expenses of $250,000 were offset
by decreases in promotional expenses of $184,000 and sales commissions of
$116,000. The increase in employee compensation expense was associated with an
increase in the average headcount. The decrease in sales commissions resulted
from a reduction in the rate at which net subscribers were added to our
installed base. Sales and marketing headcount increased to 99 at September 30,
2004 from 81 at September 30, 2003. Sales and marketing expenses increased to
$9.1 million from $8.3 million for the nine months ended September 30, 2004 and
2003, respectively. The change was the result of increases in employee
compensation of $822,000 and travel expenses of $234,000, offset by decreases
in sales commissions of $271,000 and promotional expenses of $110,000. We
expect that sales and marketing expenses will increase as we expand our sales
and marketing efforts, including, but not limited to, modest headcount growth
and promotional expenses related to new product and service offerings. Research and development expenses Research and development expenses consist of employee salaries and
expenses related to development personnel and consultants, as well as expenses
associated with software and hardware development. Research and development
expenses increased to $1.7 million from $1.4 million for the three months ended
September 30, 2004 and 2003, respectively. The change was primarily the result
of increases in external product development expenses of $286,000. Research and
development headcount increased to 67 at September 30, 2004, from 57 at
September 30, 2003. Research and development expenses increased to $4.5 million
from $4.0 million for the nine months ended September 30, 2004 and 2003,
respectively, and was primarily attributable to increases in external product
development expenses of $307,000, and employee-related costs of $231,000. We
expect that research and development expenses will increase in future periods
as we develop and introduce new products and services. General and administrative expenses General and administrative expenses consist of employee salaries and
related expenses for executive and administrative costs, accounting and
professional fees, recruiting costs and provisions for doubtful accounts.
General and administrative expenses increased to $3.2 million from $2.2 million
for the three months ended September 30, 2004 and 2003, respectively. The
change was primarily attributed to increases in consulting fees and temporary
employee-related expenses of $491,000, employee-related expenses of $262,000,
and recruiting fees of $223,000. During the nine month period ended September
30, 2003 and 2004, general and administrative expenses increased to $7.8
million from $6.8 million respectively. This change was primarily attributed to
increases in employee-related expenses of $842,000, consulting fees and
temporary employee-related expenses of $428,000 and recruiting fees of
$279,000, offset in part by a reduction in the change in the provision for doubtful accounts of
$353,000 which resulted from improved collection activity and receivables
management, and lower tax and license fees of $206,000. General and
administrative headcount increased to 67 at September 30, 2004 from 51 at
September 30, 2003. We expect that general and administrative expenses will
increase in future periods, including modest increases in employee-related
expenses and professional fees associated with our operation as a public
company. Terminated acquisition costs 17




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On April 12, 2004, we entered into a Combination Agreement with MDSI
Mobile Data Solutions, Inc. (MDSI) providing for the acquisition of MDSI. On July 27,
2004, the parties mutually agreed to terminate the Combination Agreement. As a
result, for the three and nine months ended September 30, 2004 we expensed
approximately $139,000 and $2.2 million of acquisition-related costs,
respectively. Stock compensation expense Deferred stock compensation related to stock option grants to employees
and consultants was fully amortized at September 30, 2004. Deferred stock
compensation was amortized on an accelerated basis over the vesting period of
individual awards. Interest income, net Interest income is composed primarily of interest income on cash, cash
equivalents and short-term investments. Interest expense for the three and nine
months ended September 30, 2003 related to the short-term financing of
insurance costs. Interest income net of interest expense increased to $426,000
from $151,000 and to $1.0 million from $436,000 in the three and nine months
ended September 30, 2004 and 2003, respectively. The increases are the result
of larger invested balances and higher rates of return during the 2004 periods. Other income (expense), net During the three and nine month periods ended September 30, 2004 and 2003,
other expense consisted primarily of net foreign currency translation gains
(losses) related to our subsidiary in India. Income taxes Through
2002, we incurred net losses for federal and state tax purposes,
and except for only minimum state income and franchise taxes, we have not
recognized any tax provision or benefit. Net income earned during the three and
nine months ended September 30, 2004, was offset by the utilization of prior
years net operating losses; therefore no income tax expense was provided. A
net loss was recorded for the nine months ended September 30, 2003 and,
therefore, no tax provision or benefit was recognized in that period. Net income (loss) Net income increased to $2.9 million for the three months ended September
30, 2004 from $1.1 million for the three months ended September 30, 2003. Net
income increased to $7.1 million for the nine months ended September 30, 2004
from a loss of $435,000 for the same period in 2003. Our operating costs
increased to $16.6 million from $15.7 million for the three months ended
September 30, 2004 and 2003, respectively, and increased to $49.2 million from
$47.0 million for the nine months ended September 30, 2004 and 2003,
respectively. The impact of these increases in expenses was accompanied by
increases in revenues to $19.1 million from $16.6 million for the three months
ended September 30, 2004 and 2003, respectively, and an increase in revenues to
$55.3 million from $46.1 million for the nine months ended September 30, 2004
and 2003, respectively. We believe period-to-period comparisons of our operating results are not
necessarily meaningful. You should not rely on them to predict our future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2004, we held $20.8 million of cash and cash
equivalents and $93.9 million of short-term investments. Working capital
totaled $117.9 million at September 30, 2004. We have no lines of credit as of
September 30, 2004. Net cash provided by operating activities was $7.6 million and $5.5
million for the nine months ended September 30, 2004 and 2003, respectively.
The $2.1 million increase in the net cash provided by operating activities
reflects an increase in net income of $7.5 million, offset by a $3.6 million
reduction in the net change in assets and liabilities and a $1.8 million reduction
in non-cash expenses. At
September 30, 2004 approximately $1,091,000 of our gross accounts
receivable were over 90 days old. We believe we have adequately provided
allowances as of September 30, 2004 for any such amounts that may ultimately
become uncollectible. We defer product costs at time of shipment and expense
any amounts in excess of the related product revenue at that time. We record
accounts receivable from our customers and defer related product revenue upon
installation. Both deferred product cost and revenue are recognized ratably
over the minimum service contract period. Deferred product costs are recorded
at the time of shipment and deferred product revenue is recorded at the time of
installation. As a result, deferred product costs will generally exceed
deferred revenue as we 18




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continue to grow our business. At September 30, 2004,
total deferred product costs of $18.3 million exceeded total deferred revenue
and customer deposits of $15.8 by $2.5 million. Net cash used in investing activities during the nine months ended
September 30, 2004 was $93.0 million, which was comprised of $123.0 million used to
purchase short-term investments and $879,000 used to purchase
property and equipment, offset by the proceeds from the sale of short-term
investments of $30.9 million. Net cash provided by financing activities decreased to $2.5 million from
$58.0 million for the nine months ended September 30, 2004 and 2003,
respectively. Net cash provided by financing activities in 2003 included
proceeds of $51.9 million from our second public offering and $2.0 million from
payments on notes receivable issued to stockholders. The following table represents our future commitments under minimum annual
lease payments and non-cancelable purchase commitments as of
September 30, 2004
(in thousands): Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsNon-cancelable operating lease commitments
    
    $
    6,425
    
    
    $
    381
    
    
    $
    3,382
    
    
    $
    2,186
    
    
    $
    476Non-cancelable inventory purchase commitments
    
    
    1,822
    
    
    
    1,822
    
    
    
    
    
    
    
    
    
    
    
    $
    8,247
    
    
    $
    2,203
    
    
    $
    3,382
    
    
    $
    2,186
    
    
    $
    476
 Included in other long-term liabilities is deferred rent liability of
$6,000 and $33,000, respectively at September 30, 2004 and December 31, 2003.
Payments related to these amounts are included in non-cancelable operating
lease commitments above. On June 9, 2004, we entered into a sublease for our
future principal administrative and technical offices from 2005
through May, 2010
occupying 103,000 square feet in Fremont, California. Total sublease base rent
payments are estimated to be approximately $5.2 million and  are included in
non-cancelable operating lease commitments above. We believe that our current cash and cash equivalents will be sufficient
to meet our anticipated cash needs for operating expenses, working capital and
capital expenditures for at least the next eighteen months. If cash generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain a credit facility. If additional funds are raised through the issuance
of debt securities, holders of these securities could have certain rights,
preferences and privileges senior to holders of our common stock, and the terms
of this debt could restrict our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our existing
stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain additional financing, we may be required to reduce the scope of our
operations, which could harm our business, financial condition and operating
results. RISK FACTORS In addition to the other information contained in this Report, the
following factors should be carefully considered in evaluating our business and
prospects. The risks and uncertainties described below are intended to be ones
that are specific to us or our industry and that we deem material, but they are
not the only ones that we face. If, pursuant to its announcements, AT&T Wireless ceases to operate its Cellular
Digital Packet Data network in June 2005, we may be unable to migrate some of
our subscribers to an alternate wireless network and our financial results
could be adversely affected. Beginning March 31, 2003, AT&T Wireless discontinued new sales of Cellular
Digital Packet Data (CDPD) service. AT&T Wireless has also indicated that it
expects to cease operating its CDPD network by June 30, 2005. As of September
30, 2004, approximately one quarter of our total subscribers utilize the AT&T
Wireless CDPD network (AT&T Subscribers). We are working with the AT&T
Subscribers to migrate them to an alternate wireless protocol. If the AT&T
Wireless CDPD network is terminated, the AT&T Subscribers who have not switched
to an alternate wireless protocol would have to use another CDPD network, if
available, or, if no other CDPD network is available, AT&T Subscribers would be
unable to utilize our services. While we believe that we have the capability to transition
all of the AT&T Subscribers to another protocol if we migrate a proportionate
number of AT&T Subscribers per month from now through June 2005, currently less
than such proportionate number are choosing to transition each month.
If this trend continues 19




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and all or substantially all of the AT&T Subscribers choose to migrate to other protocols
or other CDPD networks, if available, there can be no assurance that we will be
able to migrate all such subscribers by June 30, 2005. Any resulting
decrease in the total number of subscribers of our services, even if for only a
brief period, could have a material adverse effect on our financial results. If
a large percentage of the AT&T Subscribers choose not to migrate to an
alternate wireless protocol or other CDPD network, if available, or seek to
terminate their @Road services, such loss of subscribers would have a material
adverse impact on our financial results. If, pursuant to its announcement, Verizon Wireless ceases to operate its
Cellular Digital Packet Data network by the end of 2005, we may unable to
migrate some of our subscribers to an alternate wireless network and our
financial results could be adversely affected. Verizon Wireless has indicated that it expects to cease operating its Cellular
Digital Packet Data network by the end of 2005. As of September 30, 2004,
approximately one quarter of our total subscribers utilize the Verizon Wireless
CDPD network (Verizon Subscribers). We are working with the Verizon Subscribers
to migrate them to an alternate wireless protocol. If the Verizon Wireless CDPD
network is terminated, the Verizon Subscribers who have not switched to an
alternate wireless protocol would have to use another CDPD network, if
available, or, if no other CDPD network is available, Verizon Subscribers would
be unable to utilize our services. While we believe that we have the capability to transition
all of the Verizon Subscribers to another protocol if we migrate a
proportionate number of Verizon Subscribers per month from now through December
2005, currently less than such proportionate number are choosing to
transition each month. If this trend continues and all or substantially all of
the Verizon Subscribers
choose to migrate to other protocols or other CDPD networks, if available,
there can be no assurance that we will be able to migrate such subscribers by December 31, 2005. Any resulting decrease in the total number of
subscribers of our services, even if for only a brief period, could have a
material adverse effect on our financial results. If a large percentage of the
Verizon Subscribers choose not to migrate to an alternate wireless protocol or
other CDPD network, if available, or seek to terminate their @Road services,
such loss of subscribers would have a material adverse impact on our financial
results. If wireless carriers or their roaming partners cease to operate or maintain
some or all of their Cellular Digital Packet Data networks, we may lose
subscribers and our revenues could decrease. Certain CDPD carriers have entered into agreements with other carriers to
enable subscribers to use the wireless networks of other carriers in
multi-carrier CDPD coverage areas. This functionality is called
roaming, and wireless carriers who enter into these agreements are called
roaming partners. Certain roaming partners of AT&T Wireless have terminated
their CDPD networks, resulting in areas of non-coverage within this
multi-carrier coverage area. In addition, we believe that
certain CDPD carriers are limiting the support and maintenance of portions of
their wireless networks, which can result in lower quality and availability of CDPD
service for some of our subscribers and a decrease in customer
satisfaction for those subscribers. If such degradation of CDPD networks
continues, we may lose subscribers and our revenues would decrease. We face competition from internal development teams of potential customers and
from existing and potential competitors, and if we fail to compete effectively,
our ability to acquire new customers could decrease, our revenues would decline
and our business would suffer. The market for mobile resource management services is competitive and is
expected to become even more competitive in the future. If we do not compete
effectively, competition could harm our business and limit our ability to
acquire new customers and grow revenues, which in turn could result in a loss
of our market share and decline in revenues. We believe that our product and
service offerings face competition from a number of business productivity
solutions, including:  
    
    solutions developed internally by our prospective customers
information technology staff, particularly by large customer prospects;  
    
    discrete means of communication with mobile workers, such as pagers,
two-way radios, handheld devices and cellular telephones;  
    
    solutions targeted at specific vertical markets, such as a service
offered by Qualcomm that monitors assets in the long-haul transportation
sector; and 20




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
    
    solutions offered by smaller market entrants, many of which are
privately held and operate on a regional basis. In addition, we believe that our service offerings may face competition from
manufacturing companies that seek to enter the mobile resource management
market, such as Trimble Navigation. We may also face competition from our current and potential partners, such as
wireless carriers, that may develop their own solutions, develop solutions with
captive and other suppliers or support the marketing of solutions of other
competitors. We also face numerous challenges associated with overcoming the following
competitive factors:  
    
    Size and resources.Many of our current and potential competitors
have access to substantially greater financial, marketing, distribution,
engineering and manufacturing resources than we do, which may enable
them to react more effectively to new market opportunities and customer
requirements. Furthermore, these competitors may be able to adopt more
aggressive pricing policies and offer more attractive terms than we can.  
    
    Name recognition.Many of our current and potential competitors have
greater name recognition and market presence than we do, which may allow
them to more effectively market and sell solutions to our current and
potential customers.  
    
    Limits of service offerings.Although we offer a broad range of
mobile resource management solutions, a customer prospect may require
functionality that we do not offer, which may enable current and
potential competitors to exploit the areas in which we do not develop
service offerings.  
    
    Customer relationships.Many of our current and potential competitors
have pre-existing relationships with our large customer prospects, which
may allow them to more effectively market and sell competitive mobile
resource management solutions. As we seek to serve larger customers, we face competition from businesses with
greater financial resources, and we may be unable to compete effectively with
these businesses. The existing market is competitive. Competition is particularly vigorous for
larger customers, which is a customer segment we have worked to serve. We
expect competition to increase further as companies develop new products and/or
modify their existing products to compete directly with ours. In addition,
 competitors may reduce prices to customers and seek to obtain our customers
through cost-cutting and other measures. To the extent these companies compete
effectively with us, our business could be adversely affected by extended sales
cycles or fewer sales. If wireless carriers on which we depend for services decide to abandon or do
not continue to expand their wireless networks, we may lose subscribers and our
revenues could decrease. Currently our services function on General Packet Radio Services networks, Code
Division Multiple Access 1xRTT networks, Integrated Digital Enhanced Networks
and Cellular Digital Packet Data networks. These protocols cover only portions
of the United States and Canada. If wireless carriers abandon these protocols,
such as the anticipated termination of CDPD networks, in favor of other types
of wireless technology, we may not be able to provide services to our
customers. In addition, if wireless carriers do not expand their coverage
areas, we will be unable to meet the needs of customers who may wish to use our
services outside the current coverage area. Our quarterly operating results are subject to fluctuations, and our stock
price may decline if we do not meet the expectations of investors and analysts. Our quarterly revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter due to a number of factors,
many of which are outside our control. These factors include, but are not
limited to:  
    
    changes in the market for mobile resource management services; 21




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
    
    delays in market acceptance or implementation by customers of our services;  
    
    changes in length of sales cycles of or demand by our customers for existing and additional services;  
    
    changes in the productivity of our distribution channels;  
    
    introduction of new services by us or our competitors;  
    
    changes in our pricing policies or those of our competitors or suppliers;  
    
    changes in our mix of sources of revenues;  
    
    general economic and political conditions;  
    
    wireless networks, positioning systems and Internet infrastructure owned and controlled by others; and  
    
    any need to migrate to new wireless networks, which could cause our
products to be incompatible with new wireless networks or out of date. Our expense levels are based, in part, on our expectation of future revenues.
Additionally, a substantial portion of our expenses is relatively fixed. As a
result, any shortfall in revenues relative to our expectations could cause
significant changes in our operating results from quarter to quarter. We
believe period-to-period comparisons of our revenue levels and operating
results are not meaningful. You should not rely on our quarterly revenues and
operating results to predict our future performance. Our operating results have
been, and in some future quarter our operating results may be, below the
expectations of public market analysts and investors and, as a result, the
price of our common stock may fall. Our success depends upon our ability to develop new products and services and
enhance our existing products and services; if we cannot deliver the features
and functionality our customers demand, we will be unable to retain or attract
new customers. If we are unable to develop new products or services, are unable to enhance and
improve our products and services successfully in a timely manner, or fail to
position and/or price our products and services to meet market demand, existing customers
may not add new subscribers, or we may be unable to activate new
customers with our
services, and our business and operating results will be adversely affected. If
our enhancements to existing products and services do not deliver the
functionality that our customer base demands, our customers may cancel our
services at the end of their initial contract periods, and our business and
operating results will be adversely affected. If we cannot effectively deploy,
maintain and enhance our products and services, our revenues may decrease, we may not be
able to recover our costs and our competitive position may be harmed. If one or more of the agreements we have with wireless carriers is terminated
and as a result we are unable to offer services to our customers within a
carriers coverage area, we may be unable to deliver our services, we may lose
subscribers, and our revenues could decrease. Our existing agreements with wireless carriers may in some cases be terminated
immediately upon the occurrence of certain conditions or with prior written
notice. In connection with ceasing operation of their CDPD networks, AT&T
Wireless and/or Verizon Wireless may seek to terminate or not to renew their
contracts for CDPD service with us. If one or more of our wireless carriers
decides to terminate or not to renew its contract with us, we may incur
additional costs relating to obtaining alternate coverage from another wireless
carrier outside of its primary coverage area, or we may be unable to replace
the coverage at all, causing a complete loss of services to our customers in
that coverage area. 22




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Any material weakness or significant deficiency identified in our internal
controls as part of the assessment that our independent public accountants and
we are performing pursuant to the Sarbanes-Oxley Act of 2002 could have an
adverse effect on our business. Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate
and report on their internal control structure and procedures over financial
reporting. In addition, our independent accountants must report on managements
evaluation as well as evaluate our internal control structure and procedures.
We are in the process of documenting and testing our system of internal
controls; upon completion of our review, certain deficiencies may be discovered
that will require remediation. This remediation may require implementing
certain information systems operating protocols and/or additional manual
controls, the cost of which could have a material adverse effect on our
business, financial condition and results of operations. Due to the ongoing
evaluation and testing of our internal controls, there can be no assurance that
there may not be significant deficiencies or material weaknesses that would be
required to be reported. In addition, we expect the evaluation process and any
required remediation, if applicable, to increase our accounting, legal and
other costs, and may divert management resources from core business objectives
and other business concerns. We may establish alliances or acquire technologies or companies in the future,
which could result in the dilution of our stockholders and disruption of our
business, which could reduce our revenues or increase our costs. We are continually evaluating business alliances and external investments in
technologies related to our business. Acquisitions of companies, divisions of
companies, businesses or products and strategic alliances entail numerous
risks, any of which could materially harm our business in several ways,
including:  
    
    diversion of managements attention from our core business objectives
and other business concerns;  
    
    failure to integrate efficiently businesses or technologies acquired
in the future with our pre-existing business or technologies;  
    
    potential loss of key employees from either our pre-existing business or the acquired business;  
    
    dilution of our existing stockholders as a result of issuing equity securities; and  
    
    assumption of liabilities of the acquired company. Some or all of these problems may result from current or future alliances,
acquisitions or investments. Furthermore, we may not realize any value from
these alliances, acquisitions or investments. We have a history of losses, have only recently become profitable and may not
sustain or increase profitability in the future. We have only recently become profitable and may not sustain or increase
profitability in the future. As of September 30, 2004, we had an accumulated
deficit of approximately $109.1 million. To sustain profitability we will need to
generate significant revenues to offset our cost of revenues and our sales and
marketing, research and development and general and administrative expenses. We
may not achieve or sustain our revenue or profit goals and may incur losses in
the future. To facilitate the sale of our services, we have sold and may sell
our hardware below our costs. As a result, we have experienced, and may
continue to experience, negative gross margins on the sale of our hardware.
Changes such as increases in our pricing for products and services or the
pricing of competing products and services may harm our ability to increase
sales of our products and services to new and existing customers. If we are not
able to expand our customer base and increase our revenue from new and existing
customers, we may be unprofitable. We depend on a limited number of third parties to manufacture and supply
critical components for our products and services. We rely on sole suppliers and manufacturers for a number of key components for
our products and do not have long-term agreements with any of these suppliers
or manufacturers. If these parties do not perform their obligations, or if they
cease to manufacture and supply components critical for our products and
services, we may be unable to find other suppliers or operate our business. We
cannot be sure that alternative sources for key components used in our
products, such as the Internet Location Manager and the Internet Data Terminal,
will be available when needed, or if available, that these components will be
available on commercially reasonable terms. Our sole suppliers and
manufacturers of key components include:  
    
    Motorola, our sole supplier of wireless modems operable on Integrated
Digital Enhanced Networks and of microcontrollers for our Internet
Location Manager, and 23




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
    
    Taiwan Semiconductor Manufacturing Company, our sole manufacturer of
our GPS digital receiver chips. Although we believe we have sufficient quantities of GPS digital receiver chips
to last the next twelve months, if our agreements with these or other suppliers
and manufacturers are terminated or expire, if we are unable to obtain
sufficient quantities of components critical for our products and services, if
the quality of these components is inadequate, or if the terms for supply of
these components become commercially unreasonable, our search for additional or
alternate suppliers and manufacturers could result in significant delays, added
expense and our inability to maintain or expand our subscriber base. Any of
these events could require us to take unforeseen actions or devote additional
resources to provide our products and services and could harm our ability to
compete effectively. A disruption of our services due to accidental or intentional security breaches
may harm our reputation, cause a loss of revenues and increase our expenses. Unauthorized access, computer viruses and other accidental or intentional
actions could disrupt our information systems or communications networks. We
expect to incur significant costs to protect against the threat of security
breaches and to alleviate problems caused by any breaches. Currently, the
wireless transmission of our customers proprietary information is not
protected by encryption technology. If a third party were to misappropriate our
customers proprietary information, we could be subject to claims, litigation
or other potential liabilities that could seriously harm our revenues and
result in the loss of customers. System or network failures could reduce our sales, increase costs or result in
liability claims. Any disruption to our services, information systems or communications networks
or those of third parties could result in the inability of our customers to
receive our services for an indeterminate period of time. Our operations depend
upon our ability to maintain and protect our computer systems at our co-located
data centers in Ashburn, Virginia and Redwood City, California, which
is in or
near earthquake fault zones. Our services may not function properly if our
systems fail, or if there is an interruption in the supply of power, or if
there is an earthquake, fire, flood or other natural disaster, or an act of war
or terrorism. Within each of our data centers, we have fully redundant systems;
however, in the event of a system or network failure, the process of shifting
access to customer data from one data center to the other would be performed
manually, and could result in a further disruption to our services. Any
disruption to our services could cause us to lose customers or revenue, or face
litigation, customer service or repair work that would involve substantial
costs and distract management from operating our business. If our customers do not have access to sufficient capacity on reliable wireless
networks, we may be unable to deliver our services, we may lose subscribers,
and our revenues could decrease. Our ability to grow and maintain profitability depends on the ability of
wireless carriers to provide sufficient network capacity, reliability and
security to our customers. Even where wireless carriers provide coverage to
entire metropolitan areas, there are occasional lapses in coverage, for example
due to tunnels blocking the transmission of data to and from wireless modems
used with our services. These effects could make our services less reliable and
less useful, and customer satisfaction could suffer. We depend on Global Positioning System technology owned and controlled by
others. If we do not have continued access to GPS technology or satellites, we
will be unable to deliver our services and revenues will decrease. Our services rely on signals from Global Positioning System satellites built
and maintained by the U.S. Department of Defense. GPS satellites and their
ground support systems are subject to electronic and mechanical failures and
sabotage. If one or more satellites malfunction, there could be a substantial
delay before they are repaired or replaced, if at all, and our services may
cease to function and customer satisfaction would suffer. In addition, the U.S. government could decide not to continue to operate and
maintain GPS satellites over a long period of time or to charge for the use of
the Global Positioning System. Furthermore, because of ever-increasing
commercial applications of the Global Positioning System and international
political unrest, U.S. government agencies may become increasingly involved in
the administration or the regulation of the use of GPS signals in the future.
If factors such as the foregoing affect the Global Positioning System, for
example by affecting the availability, quality, accuracy or pricing of GPS
technology, our business will suffer. Defects or errors in our services could result in the cancellation or delays of
our services, which would damage our reputation and harm our financial
condition. We must develop our services quickly to keep pace with the rapidly changing MRM
market. Products and services that address this market are likely to contain
undetected errors or defects, especially when first introduced or when new
versions are introduced. We may be forced to delay commercial release of new
services or new versions of existing services until such errors or defects are
corrected, and in some cases, we may need to implement enhancements to correct
errors that were not detected until after deployment of our services. Even
after testing and release, our services may not be free from errors or defects,
which could result in the cancellation or disruption of our services or
dissatisfaction of customers. Such customer dissatisfaction would damage our
reputation and result in lost revenues, diverted development resources, and
increased service and warranty costs. 24




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The reporting of inaccurate location-relevant information could cause the loss
of customers and expose us to legal liability. The accurate reporting of location-relevant information is critical to our
customers businesses. If we fail to accurately report location-relevant
information, we could lose customers, our reputation and ability to attract new
customers could be harmed, and we could be exposed to legal liability. We may
not have insurance adequate to cover losses we may incur as a result of these
inaccuracies. Our success and ability to compete depends upon our ability to secure and
protect patents, trademarks and other proprietary rights. Our success depends on our ability to protect our proprietary rights to the
technologies used to implement and operate our services in the United States
and in foreign countries. In the event that a third party breaches the
confidentiality provisions or other obligations in one or more of our
agreements or misappropriates or infringes on our intellectual property or the
intellectual property licensed to us by third parties, our business would be
seriously harmed. To protect our proprietary rights, we rely on a combination
of trade secrets, confidentiality and other contractual provisions and
agreements, and patent, copyright and trademark laws, which afford us only
limited protection. Third parties may independently discover or invent
competing technologies or reverse engineer our trade secrets, software or other
technology. Furthermore, laws in some foreign countries may not protect our
proprietary rights to the same extent as the laws of the United States.
Therefore, the measures we take to protect our proprietary rights may not be
adequate. Claims that we infringe third-party proprietary rights could result in
significant expenses or restrictions on our ability to provide our services. Third parties may claim that our current or future products or services
infringe their proprietary rights or assert other claims against us. As the
number of entrants into our market increases, the possibility of an
intellectual property or other claim against us grows. Any intellectual
property or other claim, with or without merit, would be time-consuming and
expensive to litigate or settle and could divert management attention from
focusing on our core business. As a result of such a dispute, we may have to
pay damages, incur substantial legal fees, develop costly non-infringing
technology, if possible, or enter into license agreements, which may not be
available on terms acceptable to us, if at all. Any of these results would
increase our expenses and could decrease the functionality of our services,
which would make our services less attractive to our current or potential
customers. We have agreed in some of our agreements, and may agree in the
future, to indemnify other parties for any expenses or liabilities resulting
from claimed infringements of the proprietary rights of third parties. Our success depends on our ability to maintain and expand our sales channels. To increase our market awareness, customer base and revenues, we need to expand
our direct and indirect sales operations. There is strong competition for
qualified sales personnel, and we may not be able to attract and retain
sufficient new sales personnel to expand our operations. New sales personnel
require training and it takes time for them to achieve full productivity, if at
all. In addition, we believe that our success is dependent on expansion of our
indirect distribution channels, including our relationships with wireless
carriers, independent sales agents and distribution partners. To date, we have
relationships with wireless carriers, independent sales agents and a limited
number of distribution partners. These sales channel partners require training
in selling our products and services and it will take time for these partners
to achieve productivity, if at all. We may not be able to establish
relationships with additional distributors on a timely basis, or at all. Our
distributors, many of which are not engaged with us on an exclusive basis, may
not devote adequate resources to promoting and selling our services. 25




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We depend on recruiting and retaining qualified personnel and our inability to
do so may cause a loss in sales, impair our ability to effectively manage our
operations or impair our ability to develop and support services and products. Because of the technical nature of our services and the market in which we
compete, our success depends on the continued services of our current executive
officers and our ability to attract and retain qualified personnel with
expertise in wireless communications, Global Positioning Systems, hosted
software applications, transaction processing and the Internet. Competitors and
others have in the past, and may attempt in the future, to recruit our
employees. In addition, new employees generally require substantial training,
which requires significant resources and management attention. Even if we
invest significant resources to recruit, train and retain qualified personnel,
we may not be successful in our efforts. From time to time, we are or may be subject to litigation that could result in
significant costs to us. From time to time, we are or may be subject to litigation in the ordinary
course of business relating to any number or type of claims, including claims
for damages related to errors and malfunctions of our services or hardware
platforms or their deployment. A securities, product liability or other claim
could seriously harm our business because of the costs of defending the
lawsuit, diversion of employees time and attention, and potential damage to
our reputation. Some of our agreements with our customers, suppliers and other
third parties contain provisions designed to limit exposure to potential
claims. Limitation of liability provisions contained in our agreements may not
be enforceable under the laws of some jurisdictions. As a result, we could be
required to pay substantial amounts of damages in settlement or upon the
determination of any of these types of claims. Although we carry general
liability and directors and officers insurance, our insurance may not cover
potential claims or may not be adequate to cover all costs incurred in defense
of potential claims or to indemnify us for all liability that may be imposed. Government regulations and standards could subject us to increased regulation,
increase our costs of operations or reduce our opportunities to earn revenue. In addition to regulations applicable to businesses in general, we may also be
subject to direct regulation by U.S. governmental agencies, including the
Federal Communications Commission and Department of Defense. These regulations
may impose licensing requirements, privacy safeguards relating to certain
subscriber information, or safety standards, for example with respect to human
exposure to electromagnetic radiation and signal leakage. A number of
legislative and regulatory proposals under consideration by federal, state,
provincial, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, wireless communications
and GPS technology, including on-line content, user privacy, taxation, access
charges and liability for third-party activities. Additionally, it is uncertain
how existing laws governing issues such as taxation on the use of wireless
networks, intellectual property, libel, user privacy and property ownership
will be applied to our services. The adoption of new laws or the application of
existing laws may expose us to significant liabilities and additional
operational requirements, which could decrease the demand for our services and
increase our cost of doing business. Wireless carriers who supply us with
airtime are subject to regulation by the Federal Communications Commission, and
regulations that affect them could also increase our costs or limit the
provision of our services. Fluctuations in the value of foreign currencies could result in increased
product costs and operating expenses. We have suppliers and manufacturers that are located outside the United States.
Some transactions relating to supply and development agreements may be
conducted in currencies other than the U.S. dollar, and fluctuations in the
value of foreign currencies relative to the U.S. dollar could cause us to incur
currency exchange costs. In addition, some of our transactions denominated in
U.S. dollars may be subject to currency exchange rate risk. We cannot predict
the effect of exchange rate fluctuations on our future operating results.
Should there be a sustained increase in average exchange rates for the local
currencies in these countries, our suppliers and manufacturers may request a
price increase at the end of the contract period. Geopolitical, economic and military conditions, including terrorist attacks and
other acts of war, may materially and adversely affect the markets on which our
common stock trades, the markets in which we operate, our operations and our
profitability. Terrorist attacks and other acts of war, and any response to them, may lead to
armed hostilities and such developments would likely cause instability in
financial markets. Armed hostilities and terrorism may directly impact our
facilities, personnel and operations which are located in the United States and
India, as well as those of our clients. Furthermore, severe terrorist attacks
or acts of war may result in temporary halts of commercial activity in the
affected regions, and may result in reduced demand for our products. These
developments could have a material adverse effect on our business and the
trading price of our common stock. Our stock price is volatile, which may cause you to lose money and could lead
to costly litigation against us that could divert our resources. From time to time, stock markets experience dramatic price and volume fluctuations,
particularly for shares of technology companies. These fluctuations can be
unrelated to the operating performance of these companies. Broad market
fluctuations may reduce the market price of our common stock and cause you to
lose some or all of your investment. These fluctuations may be exaggerated if
the trading volume of our common stock is low. In addition, due to the
technology-intensive nature and growth rate of our business and the mobile
resource management market, the market price of our common stock may rise and
fall in response to:  
    
    quarterly variations in operating results;  
    
    failure to achieve operating results anticipated by securities analysts and investors; 26




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
    
    changes in estimates of our financial performance or changes in recommendations by securities analysts;  
    
    announcements of technological or competitive developments;  
    
    the gain or loss of a significant customer or order;  
    
    disposition of shares of our common stock held by large investors; and  
    
    acquisitions or strategic alliances by us or our competitors. When the market price of a companys stock drops significantly, stockholders
often institute securities class action lawsuits against that company. A
lawsuit against us could cause us to incur substantial costs and could divert
the time and attention of our management and other resources from our business. As of October 31,
2004, a limited number of stockholders own approximately 38%
of our stock and may act, or prevent certain types of corporate actions, to the
detriment of other stockholders. Our directors, officers and greater than 5% stockholders own, as of October 31,
2004, approximately 38% of our outstanding common stock. Accordingly, these
stockholders may, if they act together, exercise significant influence over all
matters requiring stockholder approval, including the election of a majority of
the directors and the determination of significant corporate actions. This
concentration could also have the effect of delaying or preventing a change in
control that could otherwise be beneficial to our stockholders. Our certificate of incorporation and bylaws and state law contain provisions
that could discourage a takeover. We have adopted a certificate of incorporation and bylaws, which in addition to
state law, may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include the following:  
    
    establishing a classified board in which only a portion of the total board members will be elected at each annual meeting;  
    
    authorizing the board to issue preferred stock;  
    
    prohibiting cumulative voting in the election of directors;  
    
    limiting the persons who may call special meetings of stockholders;  
    
    prohibiting stockholder action by written consent; and  
    
    establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings. We have adopted a certificate of incorporation that permits our board to issue
shares of preferred stock without stockholder approval, which means that our
board could issue shares with special voting rights or other provisions that
could deter a takeover. In addition to delaying or preventing an acquisition,
the issuance of a substantial number of shares of preferred stock could
adversely affect the price of our common stock and dilute existing
stockholders. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest rate risk We are exposed to the impact of interest rate changes and changes in the market
values of our marketable securities. We have not used derivative financial
instruments in our investment portfolio. We invest our excess cash in debt
instruments of high-quality corporate issuers and the U.S. government or its
agencies. Our investment policy limits the amount of credit exposure to any one
issuer and limits our investments to maturity dates of less than one year. We
are averse to principal loss and seek to preserve our invested funds by
limiting default risk, market risk and reinvestment risk. We mitigate default
risk by investing in high credit quality securities and 27




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by positioning our portfolio to respond appropriately to a significant reduction in a credit
rating of any investment issuer or guarantor. The portfolio includes only
marketable securities with active secondary or resale markets to
provide portfolio liquidity. Cash, cash equivalents and marketable securities in both fixed and floating
rate interest-earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely impacted due to
rising interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
interest income may fall short of expectations due to changes in interest rates
or we may suffer losses in principal if forced to sell securities that have
declined in market value due to changes in interest rates. The table below presents the carrying value and related weighted average
interest rates for our cash, cash equivalents and marketable securities. The
carrying values approximate fair values as of September 30, 2004 and December
31, 2003. As of September 30, 2004, marketable securities consisted of $20.8
million with original maturity dates of 90 days or less and $93.9 million with
original maturity dates of greater than 90 days. As of December 31, 2003,
marketable securities consisted of $103.7 million with original maturity dates
of 90 days or less and $2.0 million with original maturity dates of greater
than 90 days. Average
    
    
    
    
    
    AverageCarrying
    
    rate of
    
    Carrying
    
    rate ofvalue at
    
    return at
    
    value at
    
    return atSeptember 30,
    
    September 30,
    
    December 30,
    
    December 30,2004
    
    2004
    
    2003
    
    2003Cash, cash equivalents and marketable securities
    
    (in thousands)
    
    (annualized)
    
    (in thousands)
    
    (annualized)Cash and cash equivalentsvariable rate
    
    $
    5,565
    
    
    
    0.8
    %
    
    $
    3,506
    
    
    
    0.1
    %Money market fundsvariable rate
    
    $
    553
    
    
    
    1.5
    %
    
    $
    100,163
    
    
    
    1.0
    %Cash and cash equivalentsfixed rate
    
    $
    14,732
    
    
    
    1.7
    %
    
    $
    
    
    
    
    0.0
    %Total cash and cash equivalents
    
    $
    20,849
    
    
    
    1.4
    %
    
    $
    103,669
    
    
    
    0.9
    %Marketable securitiesfixed rate
    
    $
    93,931
    
    
    
    1.7
    %
    
    $
    2,000
    
    
    
    0.7
    %Total cash, cash equivalents and marketable securities
    
    $
    114,780
    
    
    
    1.6
    %
    
    $
    105,669
    
    
    
    0.9
    %
 Foreign Currency Exchange We transact business primarily in U.S. dollars. We are subject, however, to
adverse movements in foreign currency exchange rates in those countries where
we conduct business. To date, the effect of fluctuations in foreign currency
exchange rates on expenses has not been material. Operating expenses incurred
by our subsidiary in India are denominated in Indian rupees. This subsidiary
was formed in November 1999 and provides research and development activities.
We hold fixed-price agreements denominated in U.S. dollars with key
foreign-based suppliers: Orient Semiconductor Electronics, in Taiwan,
manufactures the Internet Location Manager; Taiwan Semiconductor Manufacturing
Company, in Taiwan, manufactures our Global Positioning System digital receiver
chips; Sierra Wireless, in Canada, provides the modem for some versions of the
Internet Location Manager; and Micronet, in Israel, supplies our Internet Data
Terminal. Should there be a sustained increase in average exchange rates for
the local currency in any of the foregoing countries, our suppliers may request
increased pricing on any new agreements. If this were to occur for all of these
currencies and with each of these suppliers, a 10 percent increase in average
exchange rates could increase our product costs by approximately 4.5 percent. We do not use derivative financial instruments for speculative trading
purposes, nor do we currently hedge any foreign currency exposure to offset the
effects of changes in foreign exchange rates. Similarly, we do not use
financial instruments to hedge operating expenses of our subsidiary in India. 
 Item 4. Controls and Procedures. Within 90 days prior to the date of this Report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act). Based upon that evaluation, our principal executive officer and
principal financial officer have concluded that our disclosure controls and 28




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procedures are effective. Our disclosure controls and procedures are designed
to provide a reasonable level of assurance of reaching our desired disclosure
control objectives and are effective in doing so. There were no significant
changes in our internal controls or in other factors that could significantly
affect these internal controls subsequent to the date of their evaluation. A disclosure control system, no matter how well conceived and implemented, can
provide only reasonable assurance that the objectives of such control system
are satisfied. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within the company have been detected. We are currently undergoing a comprehensive effort to ensure compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 for our fiscal year ending
December 31, 2004. This effort includes internal control documentation and
review under the direction of senior management. During the course of these
activities, we have identified certain internal control issues which management
believed needed to be improved. The review has not identified any material
weakness in internal control as defined by the Public Company Accounting and
Oversight Board. However, we have made, and will continue to make, improvements
to our internal controls over financial reporting as a result of our review
efforts. These improvements may include formalization of policies and
procedures, improved segregation of duties and additional monitoring controls. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings. From time to time, we are subject to claims in legal proceedings arising in the
normal course of our business. We do not believe that we are party to any
pending legal action that could reasonably be expected to have a material
adverse effect on our business, financial condition or operating results. 
 Item 6. Exhibits.  31.1
    
    Rule 13a-14(a)/15d-14(a) Certification31.2
    
    Rule 13a-14(a)/15d-14(a) Certification32.1
    
    Section 1350 Certification32.2
    
    Section 1350 Certification 29




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. @ROAD, INC.By: /s/ Michael JohnsonMichael JohnsonChief Financial Officer(Principal Financial and AccountingOfficer)Date: November 8, 2004
 30




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Exhibit Index Exhibits  31.1
    
    Rule 13a-14(a)/15d-14(a) Certification.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification.32.1
    
    Section 1350 Certification.32.2
    
    Section 1350 Certification. 31